CONCORD – House and Senate budget writers Thursday officially agreed to a new two-year, $10.7 billion budget that includes a path to Medicaid expansion and likely layoffs for state workers.

Budget negotiators reached agreement on the new biennial budget in the wee hours Thursday morning, after three days of talks that often stalled over three issues: Medicaid expansion, layoffs and how much money they had to spend.

The Senate will need a two-thirds majority to approve the budget because the agreement was signed after its noon deadline to complete conference committees established to resolve differences between House and Senate bills.

Senate Finance Committee Chair Chuck Morse, R-Salem, said Senate rules are very clear, they needed to finish their work by noon. He urged Senate leadership to work to ensure the budget is approved.

"Today everybody is a little bit unhappy," Morse said, "but there is more in this budget to be happy about than unhappy."

He said the House and Senate built a strong budget that addresses the needs of the state.

House Finance Chair Mary Jane Wallner, D-Concord, said, "We have come up with what I hope is a good product," noting many of the priorities of Gov. Maggie Hassan's budget proposal such as higher education aid, the mental health and developmentally disabled systems and the Children in Need of Services program are all intact.

Hassan also praised the budget approved by negotiators.

"This bipartisan, fiscally responsible balanced budget agreement represents true and meaningful progress on the priorities that matter to the people of New Hampshire and that are critical for creating good jobs and building a more innovative economic future," Hassan said. "By restoring investments in priorities such as higher education, mental health, economic development, public safety and more, this bipartisan agreement will keep our state moving forward by encouraging innovation and maintaining the health and well-being of our families and communities."

She said the state should move forward with Medicaid expansion that will provide $2.5 billion to state health care providers and said once the commission completes its job, a special session should be held to deal with the issue.

The agreement sets up a Medicaid expansion study commission that must report its findings by Oct. 15, requires a $25 million reduction in personnel costs, funds new state employee contracts and provides more than $100 million to higher education than the last budget.

The budget does not include a 20-cent-per-pack tobacco tax increase and its 12-cent-a-gallon gasoline tax increase approved by the House, but does include $13.5 million in business tax credits passed last year that Hassan and the House wanted delayed for two years.

The House also agreed to the Senate proposed elimination of the tips tax and foregoing a $5 increase in the saltwater fishing tax.

And the compromise budget includes funds for four new charter schools, and reinstating the UNIQUE scholarship program and another program to help nursing homes.

The House and Senate will vote on the budget and other conference committee bills Wednesday.

The new budget goes into effect July 1.

Previous story follows:

CONCORD – In the wee hours Thursday morning, House and Senate budget writers agreed on the state's next two-year, $10.7 billion budget, but wrangled at length over the issues that have stalled talks for three days: Medicaid expansion, layoffs and how much money they had to spend.

About 3 a.m. the House and Senate agreed a commission to study the effects of Medicaid expansion would issue a final report by Oct. 15 but did not agree on a date for a special session to act on the group's recommendations.

About an hour earlier the two sides agreed to fewer layoffs.

Budget negotiators did agree to include the $17 million needed to pay for tentative collective bargaining agreements with state employees for the next two years that will give them a 6 percent pay raise over the two years, their first raise in five years.

A Senate counter-proposal on Medicaid expansion did not sit well with the House late in the evening when Senate President Peter Bragdon, R-Milford, said a study commission needs until November to complete its work.

House Finance Committee Chair Mary Jane Wallner, D-Concord, said "I know that when we get ready to do the work, we can get it done and we can get it done in a timely manner."

The House wanted a special session to vote on expansion that is expected to add about 58,000 people to the Medicaid rolls and provide about $2.5 billion in federal money to pay health care providers.

A legislative vote on expansion has been a sticking point with Bragdon, who insisted expansion could not go forward without legislative approval.

But House Speaker Terie Norelli, D-Portsmouth, said she needs a path to Medicaid expansion for the House to pass the budget.

Eventually the Senate and House agreed to a four-and-a-half -month study. Lawmakers could agree to a special session or the governor and executive council could call lawmakers back into session.

Bragdon argued it would be difficult for senators to agree to a special session without knowing what the commission's recommendations would be.

Laying off state employees also was a major issue for negotiators, with the House reluctantly agreeing to some reductions.

The House wanted to increase lapses -- money state departments do not spend although it is appropriated -- by $20 million and Wallner said Gov. Maggie Hassan will work with department heads to meet those goals across the budget and not just in personnel costs as the Senate proposes.

The House wants to use the lapse money to reduce a Senate-approved, $50 million across-the-board reduction in personnel costs, $20 million from state general funds.

But Senate Finance Chair Chuck Morse, R-Salem, said labor costs amount to $37 million. The Senate agreed to fund the new labor agreements and half the across-the-board personnel cuts, but will not agree to additional chagnes, he said.

"To go any further means raising revenues," Morse said, "and the Senate is not going to raise revenues."

The Senate refused to budge on raising revenue estimates and the House agreed to $10 million in general fund reduction in personnel and $25 million in all funds.

Most of the other issues between the House and Senate were resolved by midnight.

The House agreed to eliminate its 20-cent-per-pack tobacco tax increase and its 12-cent-a-gallon gasoline tax increase, while also agreeing not to delay business tax credits passed last year that go into effect July 1.

The House also agreed to the Senate proposed elimination of the tips tax and foregoing a $5 increase in the salt water fishing tax.

The House relented and agreed to include new charter school funding and reinstating the UNIQUE scholarship program and another program to help nursing homes.

The House agreed with the Senate's proposal to use $20 million in general funds for uncompensated care costs for hospitals.

Many of the major items in the House and Senate approved budgets are identical such as $100 million more for higher education and $28 million for the mental health system. Both sides increased the money to offset uncompensated care absorbed by hospitals and other health care providers, but accomplished it in different ways.

Several popular Health and Human Services initiatives -- eliminating the developmentally disabled wait-list for services and the Children in Need of Services program -- receive about the same amount of money in both the House and Senate budgets.

The Senate approved a budget of $10.7 billion, while the House's budget is $11 billion. Both the House's and Senate's plans spend approximately $2.8 billion general fund money.